Feeling Lucky? Roll the Dice With Your Liquidated Damages Clause

Posted on February 06, 2015

“Liquidated damages” are a predetermined amount of damages that parties designate during the negotiation of a contract, and which for an aggrieved party is entitled to collect as compensation for specific breach of the agreement. For example, a commercial building contract might have a liquidated damages provision stating that the contractor must pay the owner a sum of $100/day for each day past the completion date which the project is not finished.

It is critical that liquidated damages provisions aren’t too aggressive, however, as the higher the amount of liquidated damages, the greater the risk that a court will deem them an unenforceable penalty. Understanding how liquidated damages provisions work, and the extent to which they are valid, is becoming more and more important, as contracts that allow an owner to recover liquidated damages are increasingly common in the construction industry.

The proliferation of such provisions has recently given Ohio’s judiciary reason to take another look at the law governing liquidated damages in the construction context, with some unexpected results. Historically, Ohio courts have recognized and upheld liquidated damages clauses when: (1) the actual amount of damages a party would suffer from a specific breach were uncertain or difficult to prove; (2) in the context of the contract as a whole, the amount of liquidated damages is not “manifestly unconscionable, unreasonable, and disproportionate in amount”; and (3) the parties intended for the amount specified as liquidated damages to apply in the event of a breach.

This understanding of the law was recently turned on its head by a decision out of Ohio’s Fourth District Court of appeals in Boone Coleman Construction v. Village of Piketon, 2014-Ohio-2377. In Boone Coleman, the defendant, Village of Piketon, Ohio, solicited bids for a public construction project for roadway improvements. Boone Coleman Construction, Inc., won the contract and agreed to build the project for $683,300.00. The contract stated that, if Boone Coleman failed to substantially complete its work within 120 days, it would be obligated to pay the Village $700/day in liquidated damages until the project was substantially completed. Boone Coleman completed the project 397 days late, and the Village deducted the liquidated damages from the contract price, paying Boone Coleman only $535,823.00.

Boone Coleman sued the Village for the balance of the contract price and the Village counterclaimed for $277,900 in liquidated damages. The trial court granted judgment in favor of the Village, finding that the Village was not liable to Boone Coleman, and that Boone Coleman was accountable to the Village for liquidated damages. On review, the Fourth District Court of Appeals disagreed with the trial court’s decision to enforce the liquidated damages provision against Boone Coleman. Specifically, the Court of Appeals ruled that $700/day in liquidated damages was unreasonable because the total liquidated damages assessed of $277,900.00 “produced an award nearly equal to 1/3 the value of the contract.”

The Court of Appeals recognized that “[r]easonable compensation for actual damages is the legitimate objective of liquidated damages provisions” and noted that its decision was partially based on the fact that the Village failed to produce any evidence to support the relationship between the damages specified and the actual damages that would be incurred. Because the massive amount of liquidated damages bore no reasonable relationship to the actual damages suffered, the amount constituted an unenforceable penalty.

The Boone Coleman decision is currently being considered by the Ohio Supreme Court, and a determination as to its validity is expected sometime in the summer of 2015. Depending on how the Ohio Supreme Court rules, the way in which liquidated damages provisions are evaluated and used in the construction industry may be impacted immensely. Liquidated damages and other contract provisions are issues that can, and should, be discussed with experienced legal counsel. For questions regarding liquidated damages provisions, or any other aspect of Ohio construction law, please contact Todd Harpst or Nick Horrigan, at Harpst Ross, Ltd. – Business Lawyers for the Construction Industry®, at (330) 983-9971 or tharpst@harpstross.com or nhorrigan@harpstross.com.

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